Jerome Powell and FOMC Tell the Markets They Are Out of the Rate-Hiking Business

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If you read our recent preview for the FOMC meeting, you wouldn’t be too shocked that the Federal Reserve’s Federal Open Market Committee (FOMC) didn’t raise interest rates on Wednesday. That 2.25% to 2.50% target fed funds range was kept steady in a unanimous 10-0 vote.

It turns out that taking the view that Federal Reserve Chairman finally blinked in the wake of the market sell-off and economic slowdown in late 2018 was the right view. Unfortunately, the markets continued to slide into year-end.

What is pleasing the markets on top of no more serious rate hikes is the Feds signal of when it plans to taper its running off of the massive $4 trillion or so balance sheet.

The Fed’s communication indicated it would begin tapering its balance sheet run-off in May and would end that run-off by October. One thing that was communicated is that the Fed will continue to run down its  balance of mortgage-backed security holdings, rolling the balance into Treasury bills and notes.

According to Wednesday’s announcement, inflation has been kept in check with lower oil prices. The FOMC has also acknowledged that the labor market remains strong but that the economic growth has slowed down since the fourth quarter.

We were also given some longer-term outlooks as well by the FOMC.

Fed officials have Fed Fund forecasts now as 2.4% for the end of 2019, 2.6% at the end of 2020, and 2.6% at the end of 2021. Again, that’s versus a current  2.25% to 2.50% range. Fed officials see the Fed Funds rate at a median of 2.8% in over a long-term view.

Other FOMC targets were shown below:

  • 2019 GDP growth of 2.1% (down from 2.3% last December)
  • 2019 PCE Inflation at 1.8% (down from 1.9% last December)
  • 2019 Unemployment at 3.7% (up from 3.5% last December)

The Dow had been down close to 200 points earlier in the day, but it was down just about 20 points at 2:15 with the S&P 500 now up 3 points and the tech-heavy NASDAQ having swung up 25 points on the day to almost 7,750 after trading as low as 7,674.

The formal FOMC statement for the March 20, 2019 decision on interest rates was shown with the following important snippets:

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

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